Emerging markets feel USA's pain

— -- Spooked by fears of spreading global economic weakness, investors are pulling funds from once red-hot emerging markets. That's led to steep stock price declines from Kiev (down 61% this year) to Karachi (off 47%).

"Things in the world don't look good," says Antoine van Agtmael, head of Emerging Markets Management, an investment firm. "And this time, it started in the USA. It's here that this wave of problems in the financial sector started."

The retreat from abroad is spurring a strong rebound in the dollar. Thursday, the rejuvenated greenback hit its highest mark against the euro in a year. In New York, a euro cost $1.39, meaning the dollar has now gained 13% since mid-July. "U.S. investors moved money offshore. … Now people are taking that back," says Marc Chandler, senior vice president for currency strategy at Brown Bros. Harriman.

The emerging markets pullback is occurring against a backdrop of what financial analysts call "deleveraging," or a widespread paying down of debt by institutions and individuals. Since emerging markets investments have soared the past few years, investors have been cashing in their winnings to cover losses on other assets.

So far this year, net foreign selling in seven Asian stock markets tracked by Bloomberg totaled more than $52 billion. That's driven Morgan Stanley's emerging markets index down more than 31%.

Not long ago, emerging markets were regarded as the investing world's answer to casinos — a marriage of potential profits and guaranteed risk. But since the 1997 Asian financial crisis, numerous developing countries have improved their economic management and protected themselves against sudden changes in investor sentiment by stockpiling huge financial reserves.

The past five years, these formerly fringe economies were responsible for about two-thirds of global growth, the International Monetary Fund says.

Several factors now are hammering emerging markets. Falling prices for commodities, including oil and copper, have hurt countries such as Russia and Brazil. Though growth remains robust compared with the anemic economies in the U.S. and Europe, countries such as China, South Korea and Venezuela are slowing. And weakness in the developed world is crimping exports from factories in Taiwan and elsewhere.